Redbox owner Coinstar feeling content pinch

Analysis: Fewer new titles, more expenses spark selloff on shares

SAN FRANCISCO (MarketWatch) — If in real estate the old adage of “Location, location, location” holds true, the equivalent in market for DVD rentals and video-streaming would have to be “content, content, content.”

Redbox will add fewer new DVDs to its kiosks in the first quarter, causing parent Coinstar to issue a weak forecast that sparked a sell-off on its stock on Friday.

Coinstar Inc.
CSTR, -0.81%
, which owns Redbox and its 43,000 DVD-rental kiosks across the U.S., found out the hard way just how important content — and the promise of more content in a timely manner — matters in efforts to better compete against the likes of Netflix Inc.
NFLX, +0.46%
Amazon.com
AMZN, -0.13%
and online video aggregator and streaming site Hulu.

The stock fell nearly 9% by early Friday afternoon to $47.44. This was a reaction to what company officials said late Thursday about the number of new DVDs Redbox will offer in the first quarter of the year, and when the kiosks will get those titles. Combined with new expenses associated with the rollout of the new Redbox Instant video streaming service, investors showed they have little patience when other video rental and streaming options are available.

At the heart of the matter was Coinstar Chief Financial Officer Scott di Valerio saying that Redbox added just 12 new release titles to its kiosks in January — barely half of the 23 new release titles it added in the same month a year ago.

Di Valerio said on a conference call Thursday that more new release titles are set to roll in during February and March, and the company should end up with about the same number of new releases as it did in last year’s first quarter. But, he added, “certainly, they are coming in the later part of the quarter, which challenges the start-up like we had [in the first quarter of] last year.” Di Valerio is soon to take over as Coinstar’s Chief Executive from Paul Davis, who is retiring.

Due in part to the lack of new Redbox content, Coinstar forecast earnings of between 77 cents and 92 cents a share, on revenue in a range of $568 million and $593 million for its first quarter, which fell short of the $1.22 a share and $628.8 million in consensus sales estimates from analysts surveyed by FactSet for the quarter.

For its part, Coinstar is taking steps to maintain Redbox customer loyalty. The company is working on revamping its kiosks so that they can fit 80 more discs, on top of the 600 that the machines usually hold. And beginning Jan. 1, the company entered into a new agreement with Warner Bros.
TWX, -0.28%
in which Redbox with get the rights to Warner’s Blu-Ray and DVD titles 28 days after their retail release.

The company is also revamping the Blockbuster kiosks it recently acquired from NCR Corp.
NCR, +1.28%
It also expects to install between 1,500 and 2,000 kiosks in Canada this year, and is betting big on its Redbox Instant joint venture with Verizon
VZ, -0.78%
a video-streaming service that is in beta testing and will cost consumers $8 a month upon rollout.

“We believe as the year goes on, revenue trends should improve as should transactions per kiosk, as new kiosks ramp, increased stability from [Redbox] Instant, and the company’s vertical merchandising zone, which adds 80 discs to each kiosk,” Northland Capital Markets analyst Darren Aftahi wrote in a research note. Aftahi holds an outperform rating and $62 a share target price on Coinstar’s stock.

But while Redbox Instant is Coinstar’s high-profile effort to stake a claim to the video-streaming market, expenses are adding up.

According to Wedbush Securities analyst Michael Pachter, Redbox — which owns a 35% stake in the joint venture with Verizon — took charges of more than $20 million in the fourth-quarter related to building out the service. Pachter also noted that Coinstar expects to take a charge of between $9 million and $11 million in the first quarter, and up to as much as $16 million for the joint venture this year.

“The company provided no visibility on when investors should expect revenue or profit contribution from the Verizon joint venture,” Pachter said. “And considering that Coinstar first mentioned its plans to partner with another company back in April 2010 and announced the Verizon deal over a year ago, it is troubling that the actual rollout beyond beta is taking so long.”

In the meantime, Netflix has seen investors come back following its exclusive deal with Walt Disney Co.
DIS, -0.94%
even though it doesn’t start until 2013, and Amazon just scored the exclusive video-streaming rights to the hit PBS series “Downton Abbey,” showing that there is no rest in the battle to offer marquee-quality content for subscribers.

Of course, if Redbox Instant is a hit, all concerns about content could end up being moot. For now, Redbox appears to be trying to fill up those rental kiosks as fast as possible with new DVDs.

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